Business Activities, Employment and Inflation Term Paper

Business Activities, Employment and Inflation - Term Paper Example If the injections of an economy (J) are not equal to the withdrawals (W), then there is a clear disequilibrium in the economy. The only factors that bring this equilibrium back into line is the change in the national income (GDP) and the levels of employments (Sloman and Sutcliffe). To understand the above figure better, lets consider that the economy is faced with a state of equilibrium, i.e. the levels of withdrawals and the level of injections is the same. If there is an increase in the injections, and the firms aim at investing more into the company, then the aggregate demand, i.e. Cd will also be higher. Hence to meet up with this demand, the firms will also need to increase the labor and other resources which would in turn lead to higher levels of incomes for the households (Y) (Sloman and Sutcliffe). With an increase in the income of the households, there will be an increase in the expenses as well, which in turn will lead the firms to also sell higher. Higher sales will mean the firms need to produce higher which again would mean more labor, and other resources (Mankiw). This is a multiplied affect that will continue to go on within the economy. This effect is referred to as, ‘Multiplier Effect’ and is defined as, ‘an initial increase in aggregate demand of $Xm leads to an eventual rise in national income that is greater than $Xm’ (Sloman and Sutcliffe). This follows the principle of ‘Cumulative Causation’, which can be defined as, ‘An initial event can cause an ultimate effect which is much larger’ (Sloman and Sutcliffe).